If Etihad and Emirates Hook Up, Will Airbus Be Biggest Loser?

That rumbling you hear is coming out of the Middle East, where a comment from an airline executive sent the rumor mill spinning. The comment came from Emirates president Tim Clark, who said in an interview with Reuters that the airline is open to cooperation with local competitor Etihad Airways. Clark added that a full merger was “unlikely” but up to the owners, which are for Emirates the government of Dubai and for Etihad, the Abu Dhabi government.

Was cold economic reality behind Clark’s eyebrow-raising “cooperation” statement? Emirates, which is already reportedly cutting some service, might benefit from consolidation. “Oil revenues haven’t flowed in that part of the world so the governments are tightening their belts”, says Seth Kaplan, managing partner of Airline Weekly. Whether the two airlines partner, cooperate or actually merge, he adds, “It’s something they need to consider; Etihad is not going to make money anytime soon.”

The three allegedly "massively-subsidized Gulf airlines" (Emirates, Etihad and Qatar) have been accused of violating the Open Skies agreement, which gives them access to the US market, reportedly receiving more than $50 billion in subsidies since 2004.

Etihad, whose reservation page includes a "Reserve chauffeur" button, hasn’t specifically commented on Emirates’ interest. But the airline, which reportedly had money-losing investments in Air Berlin and Alitalia, did say, "We constantly seek opportunities for innovative collaboration with other organizations, where it makes business and commercial sense.”

A combination might also cut down on overcapacity, while pilots, mechanics, and flight attendants already trained on particular aircraft operated by both airlines could be easily integrated into a merged carrier.

In addition, as Kaplan notes, Dubai World Central (DWC) when completed will be the world’s largest airport with an ultimate capacity of 160 million passengers and 12 million tons of cargo per annum. The new airport is in southwest Dubai, just an hour and a quarter from Abu Dhabi.

“Emirates has been struggling for the last few years. Etihad is an airline that has never been viable. There’s a very compelling case for consolidation; the reason not to do is is politics,” says Kaplan. “That’s a question for the highest level of Abu Dhabi’s government. You’ll lose non stop flights from Aub Dhai all over the world.”

Whatever arrangement Emirates and Etihad eventually agree to may have a cost to Airbus, particularly in relationship to its troubled A380 program. As Clark of Emirates noted, “There are many areas that the airlines could work together on like procurement.”

Etihad operates some 77 AirBus aircraft, including 10 A380-800s, the largest passenger planes in the world. Emirates operates some 98 of the giant A380s. So between them, the two airlines account for fully half of the 216 A380s delivered to date. (The third Gulf competitor, Qatar, has an additional 8 A380s.)

With cancellations up and the production line slowing, the consolidation that might help these airlines could end up being another nail in the coffin of the A380. As Kaplan puts it, “The A380 is such a troubled program. It’s clearly a financial disaster for them. It hasn’t sold well, it’s not what airlines wanted. You have to sell 500 seats profitably or not fly.”

Would nationalism, politics and pride prevent Abu Dhabi from merging its money-losing airline with Emirates? Perhaps. But as Kaplan notes, even the fabled wealth of the Gulf has its limits. After all, even after investing hundreds of millions of dollars, the government of Qatar shut down Al Jazeera America.

(Michael Goldstein - Forbes)